Losing money is never good.
But in business, it’s inevitable.
What’s important is calculating how much of that lost revenue is sinking you.
Because if you lose too much, you can say goodbye to staying afloat.
And that’s where revenue churn comes in.
Revenue churn measures the amount of revenue that a SaaS company loses over a given period (usually a month or year).
For smooth sailing, your growth rate has to exceed your revenue churn rate.
But how do you ensure this?
Further Reading
- Find out everything about Activation Rate and ten fantastic ways to help customers reach their ‘aha! moment’ faster.
- Learn everything about Product Qualified Leads (and how to identify one!).
- Check out five insightful tips to improve your ARPU and stay on top of your SaaS game.
This Article Contains:
(Click on the links below to jump to a specific section)
- What Is Revenue Churn?
- Why Does Revenue Churn Matter?
- Types of Revenue Churn: Net vs Gross Revenue Churn
- How to Calculate Revenue Churn?
- Revenue Churn Benchmarks
- How to Reduce the Revenue Churn Rate
- Related Metrics
- Revenue Churn FAQs
Let’s get started!
What Is Revenue Churn?
Revenue churn is the percentage of recurring revenue a company loses over a period of time.
It is also commonly known as MRR churn (monthly recurring revenue churn).
Subscription-based companies may churn revenue when customers:
- Cancel their subscriptions (voluntary churn).
- Fail to renew their subscriptions.
- Downgrade their accounts.
Tracking revenue churn can help a SaaS company keep an eye on its business health, evaluate the effectiveness of its marketing efforts, and monitor customer retention.
But what type of businesses is this metric applicable to?
Let’s find out.
Who Should Track Revenue Churn?
Companies from various industries can track revenue churn, but it’s more popular with businesses that operate on a subscription or recurring revenue model – especially SaaS companies.
Tracking revenue churn allows SaaS and B2B service providers to understand and assess the effectiveness of their products in retaining customers.
How?
Revenue churn provides insights into the rate at which customers are canceling their subscriptions. By understanding these trends, SaaS businesses can gauge the level of customer satisfaction, evaluate their service’s effectiveness and identify improvement areas.
Tracking churn also helps companies accurately forecast their revenue streams, which can guide financial planning, resource allocation, and growth targets.
Apart from SaaS businesses, some other companies that can track revenue churn are telecommunication and e-commerce companies, financial institutions, and media and entertainment platforms (Spotify, Netflix, etc).
Essentially, any company that offers something that isn’t a one-off purchase can greatly benefit from tracking this metric.
Now that you know what revenue churn is and who should track it, let’s understand why it’s important.
Why Does Revenue Churn Matter?
Revenue churn is an important metric because it lets you:
1. Adds Context to Customer Churn
Revenue churn helps you analyze and monitor your losses to add context to what may be causing customer churn.
How?
If you offer multiple price tiers and observe a high customer churn rate but a low revenue churn, it could mean you are retaining high-tiered customers while losing low-tiered ones.
So what can you do?
You might need to buff up your lower-tiered options to make them more appealing.
Additionally, as your high-tiered customers are sticking around, it probably means those customers find the most value in your product. Look at those users and tailor your marketing to appeal to them in particular.
2. Fine-Tune Your Pricing
A churned customer may have decided to discontinue using your services because the plans you offered were either too expensive or did not offer enough value for the price.
For example, if most of your low-tier accounts are churning, it could mean that although your plans are affordable, they do not offer enough valuable features for customer retention.
On the other hand, if a majority of your high-value accounts are churning, then it could mean that these plans are too expensive to justify a sustained subscription. In such a case, you will have to provide more advanced features to justify the value of your product or reduce the price.
3. Monitor Revenue Retention for Future Growth
Revenue churn can help determine how well you retain your revenue and is a key indicator of a company’s progress and stability.
High revenue retention rates depict a stable customer base and great growth potential, which may appeal to investors.
But that’s not all.
A high revenue churn rate can also help you anticipate future problems. This is crucial since revenue loss can result in companies failing to meet their financial obligations, such as paying vendors, payrolls, rent, etc.
It also affects a company’s capacity to invest in advanced technologies, products, and services, potentially resulting in a higher churn rate.
Ready to measure your revenue churn rate?
We’re almost there!
But first, let’s look at the types of revenue churn.
Types of Revenue Churn: Net vs Gross Revenue Churn
There are two types of revenue churn:
Net revenue churn: Net churn is the measure of lost revenue from cancellations and downgrades after considering new revenue gained from your existing customer base via upsells, cross-sells and more.
Here’s the formula to calculate the Net MRR churn rate:
| Net MRR Churn Rate = [(MRR beginning of the month – MRR end of the month) – (Expansion MRR)] / [(MRR beginning of the month)] X 100 |
Gross revenue churn: The percentage of revenue lost in a month due to subscription downgrades or cancellations, irrespective of the revenue you may have gained from existing customers.
Here’s the formula to calculate the Gross revenue churn rate:
| Gross MRR Churn Rate = [(Downgrade MRR + Cancellation MRR) / (Total MRR at the beginning of the period)] X 100 |
So, while net churn factors-in expansion revenue, gross churn only focuses on revenue lost from cancellations and downgrades.
Which one should you use?
Net revenue churn is usually a more whole holistic indicator of how you’re doing as it doesn’t only focus on what you’ve lost. However, gross revenue churn can still be a useful metric when you have high churn rates and need to evaluate how much you’re actually losing.
How to Calculate Revenue Churn
Here’s the formula for revenue churn calculation:
| Revenue Churn Rate = (MRR lost that month – MRR in upgrades during the month)/ (MRR at the beginning of the month) X 100 |
Let’s understand this with the help of an example:
Suppose a company had $100,000 monthly recurring revenue (MRR) at the beginning of the month, it lost $10,000 due subscription cancellations but gained $2,000 MRR in upgrades during the month from existing customers.
So, the net revenue churn rate will be:
($10,000 – $2,000) ($100,000) x 100
($8,000) ($100,000) = 0.08 x 100
= 8%
This means you lost 8% of your revenue.
But…
What’s the next step, and how do you put this data to use?
How to Use Revenue Churn
Once you have calculated revenue churn, the next step is to analyze the data and identify the main cause of churn.
If your company’s revenue churn calculation doesn’t meet industry standards, you can use these calculations to identify the underlying issues within your business processes.
Churn could arise due to poor customer service, product issues, pricing concerns, or customers switching to a competitor platform.
Analyzing the causes of high churn can help you refine your product offerings and implement customer retention strategies to reduce churn.
How can you crack down on this?
Conduct a segmentation analysis alongside your revenue churn rate. Segmentation analyses can help you analyze churn rates based on different customer segments and cohorts.
How does this work?
By comparing the churn rate among various segments, you can identify which groups have a higher churn rate than others. This will give you an understanding of the customer characteristics and demographics contributing to churn.
Another way to identify churn factors is by examining the churn rate over different periods, such as months, quarters, and years.
Watch out for changes or spikes in churn rate during specific periods. This will help you understand if certain situations, updates, pricing changes, or seasonal factors impact your churn rates.
This brings us to our next question…
How often should you track it?
How Often Should You Measure Revenue Churn?
While revenue churn is usually calculated monthly, you can also track it quarterly or annually.
Once you have analyzed your churn data and identified the factors contributing to churn, you can benchmark your churn date against industry standards.
Benchmarking helps you understand how your business is performing compared to your competitors. Using this comparison, you can work on areas needing further improvement.
Now you may be wondering…
What are these benchmarks, and is there any such thing as a good revenue churn rate?
Revenue Churn Benchmarks
Benchmarks for SaaS churn are hard to pin down, as they can differ widely across companies and industries.
However, ProfitWell did a massive study on 3,000+ subscription companies and had some telling insights on the typical SaaS revenue churn rate.
For instance, established companies typically exhibit a lower revenue churn rate, ranging from 2-4%.
On the other hand, companies that are three years old or less tend to have a higher churn rate, often ranging from 4-24% (with a median revenue churn rate of 11%).
So what’s the final figure?
When it comes to net revenue churn, you should aim for a net negative churn (i.e., the gains you make from new subscriptions, upsells, etc., should exceed the losses from downgrades, cancellations, etc.)
As long as you have a net negative revenue churn rate, your company is in a happy place.
But…
Are your revenue churn rates not where you want them to be?
Let’s check out some ways to help you reduce your SaaS churn rate.
How to Reduce your Revenue Churn Rate
Here are a few steps you can take to reduce your revenue churn rate.
1. Ensure Customer Success
Customer success management is all about helping your customers succeed with your product. The easier it is for them to find value in your product, the less likely they are to churn.
You can boost customer success by:
- Enhancing the onboarding experience: Improve your onboarding experience by adding tutorial videos, product demos, and checklists.
- Investing in self-service: Customer self-service channels like a knowledge base or chatbots allow customers to solve their problems independently. This way, they can quickly derive value from your product without contacting customer support.
- Creating a proactive sales team: Ensure your sales team knows when to reach out to users. For example, sales reps should reach out to potential customers once they’ve hit a paywall or if they can’t seem to derive value from your product.
These strategies can create a more personalized user experience for your new or existing customers, helping them achieve their objectives.
2. Upselling and Cross-Selling
Upselling and cross-selling new and existing customers can help improve your net revenue churn rate.
What do these strategies involve?
Upselling is a sales technique that encourages customers to purchase a more expensive plan. Conversely, cross-selling encourages customers to purchase add-ons or complimentary items to their existing plans.
Here’s an example:
Suppose a customer considers a lower-tiered plan at check-out, a sales rep can encourage them to opt for a premium plan with additional features or persuade them to purchase add-ons to enhance their experience – usually at a cheaper price than usual.
3. Implement Customer Feedback
If you give your customers what they want, they are less likely to churn.
How do you do this?
Regularly gathering feedback through surveys from a lost customer helps determine the reasons for service cancellations and identify areas where they face problems.
Feedback from a lost customer provides valuable customer service insights that ultimately enhances their overall user experience.
By continuously improving your service, you can reduce your churn rate and foster a loyal customer base, leading to increased revenue and business growth.
4. Prevent Cancellations by Offering Alternatives
Preventing cancellations can help SaaS companies improve their revenue retention.
Even if the customer spends less money on the product, the company can still generate revenue from that customer rather than losing them altogether.
Here are three ways a SaaS business can prevent cancellations:
- Offer discounts and package deals: By offering discounts or access to premium features, customers may be more likely to continue their subscription instead of cancelling. This can be especially effective if the incentive is only available for a limited time or if it’s tied to a specific behavior (such as renewing their subscription for another year).
- Offer users the option to downgrade: Giving customers the option to downgrade can reduce the likelihood that they will cancel their subscription entirely. For example, if a customer no longer uses all the features of a premium subscription, they may be more likely to downgrade to a lower-priced plan rather than cancel entirely. While this will still result in lost revenue, it’s not as much as a cancellation.
- Encourage long-term contracts: Another savvy way to prevent contract cancellations is by offering your customers long-term or annual contracts at a discounted price, reducing the chances of voluntary churn.
Let’s have a look at some other metrics you could track along with revenue churn.
Related Metrics
Below are a few other key metrics you can monitor to improve your revenue churn rate:
1. Customer Churn Rate
Customer churn rate is the percentage of customers that stopped using your product or services over a specific period.
| Customer Churn Rate=([Customers at the beginning of the month] – [Customers at the end of the month] / [Customers at the beginning of month] X 100 |
2. Net Dollar Churn
Net dollar churn measures revenue lost and gained from your existing customer base:
| Net Dollar Churn= Revenue lost from cancellations + Revenue lost from customer downgrades or less spending – Revenue gained from existing customers spending more |
3. ARR
ARR or annual recurring revenue is the predictable revenue generated by your business over a year.
| ARR = (Total contract value) X (12 / Length of contract in months) X (Number of customers) |
4. Retention Rate
Customer retention rate is the percentage of customers who continue to use your product or service over a specific period.
| Customer Retention Rate=[( Number of customers at the end of the period – New customers during the period) / Number of customers in the beginning of the period] X 100 |
5. Renewal Rates
The renewal rate depicts the percentage of customers who renewed their contracts at the end of their subscription period.
| Renewal Rates by Contracts = Number of extended contracts / Total number of renewable contracts X 100 |
Now, it’s time to answer some questions you may have in mind about revenue churn.
Revenue Churn FAQs
Here are the answers to some of the most frequently asked questions on revenue churn.
1. What is the Difference between Revenue Churn and Customer Churn?
Customer churn refers to the percentage of customers you lose over a certain period. Revenue churn, on the other hand, is the percentage of revenue you lose over a period.
2. What is a Negative Revenue Churn?
In net negative churn, the expansion MRR exceeds the MRR churn rate. Negative churn occurs when additional revenue from existing customers exceeds lost revenue from downgrades and cancellations.
Contrary to its name, a negative revenue churn rate is actually a positive indicator, where it’s good for your business!
Wrapping Up
To improve your revenue churn rate, it’s essential to prioritize customer retention. The strategies mentioned above can help companies reduce their churn rate while simultaneously fostering customer success.
However, neglecting your marketing tactics may lead to missed opportunities in converting qualified leads into paying customers.
Startup Voyager is a growth agency specializing in helping SaaS companies create high-quality, optimized content to attract more prospects and reduce their SaaS churn rate.
Get in touch with a growth expert at Startup Voyager today!